Recourse from an industrial customer perspective

02 February 2010
Lessons from Losses 1/2010. ‘It’s not over till the fat lady sings’ is a phrase that could well express the aim of If’s recourse activities: a customer suffers damage, we pay out compensation in accordance with the insurance agreement. However, the financial result of the claim may not be established until we carry out a recourse process, ie that we have assessed the possibility of recovering the amount from someone who may have caused the damage or is otherwise responsible for compensation for the incident. Recourse is thus a natural part of our customer relations, and it is the final result which is significant when we – both insurance company and customer – add up our respective damage costs.

The concept of ‘recourse’ is used in several different legal areas, but this article concentrates solely on situations related to insurance.

Claim for damages

Appropriate insurance is always the quickest and most secure way of ensuring compensation after an incident. However, if there is no insurance, or if the insured does not want to apply the policy, there is always the possibility of making a claim for damages if it is possible to identify whoever is responsible for the damage.

This procedure assumes legal competence on the part of the claimant or whoever acts for them, and is demanding of both cost and time. Also, the claimant faces the risk of losing the case, and not only failing to obtain damages, but also of having to pay the court costs and those of the defendant.

Joint recourse

The undertaking If has to a policyholder is defined in the specific insurance agreement and may be simplified by saying that damage compensation is paid if the conditions of the agreement are met. In a claim involving financial loss to a customer, therefore, the possibility of compensate the whole loss through insurance is limited partly by the agreed excess, and partly by damage to property and costs not covered by the policy. In the case of large losses, compensation may be limited by the sum assured, especially where underinsurance restricts the sum payable.

This does not mean however that our customer’s ability to cover their loss depends only on what may be obtained from the insurance itself. Through our insurance relationship, we may make a joint claim against a respondent, ie whoever is responsible for the damage or otherwise liable on contractual grounds.

Recourse organisation

When an incident report comes in to If, the task is assigned to a claims adjuster who has to identify the possibility of making a recovery on behalf of If. Should the claim involve a higher value, what is known as a ‘claims commission’ consisting of several claims adjusters is set up, and they jointly assess the possibilities of recovery.

In order to increase the chances of success with recourse, preparations should be set in motion as soon as possible, and our best chance of success lies in the insured providing us with of all relevant information at the earliest possible stage.

Best of all is when the insured has identified the person or persons responsible for the damage, and has supplied information of significance for recourse in the incident report. The largest companies also have their own organisation responsible for contacts with If. We know from experience that our customers have both the competence and the will to make a successful recovery, and it is in the interests of both the customer and ourselves to ensure that recovery is successful.

Two important factors

This may be the place to emphasise the importance of two relevant factors. First, if it is a matter of a contractual relationship between the damaging and damaged parties, the claim must be made at the right time. If an agreement includes a given period for claims, even the most clearly justifiable claim may fail on the grounds of late presentation.

Second, evidence must be collected as quickly as possible, by, eg, creating photographic documentation of the site, obtaining and storing details of faults and causes of damage, writing incident reports, taking statements from and names of those who may have information on what took place before, during, and after the incident. These actions should be carried out by our customer if there is a delay before If is involved via a claim report, otherwise there is a risk that evidence will be lost – people forget, things, ‘disappear’, and so on.

Collaboration

As described above, as far as If is concerned, the claim consists of an amount corresponding to the insurance compensation paid, and we normally use in our written claim the statement the complaint that the insured has had costs not covered by the policy. In our claim we state the legal reasons why the respondent should pay our recourse claim.

An example might be that our insured party was a property owner, that the respondent as plumbing and drainage Contractor had caused water damage due to a faulty installation, and that under their joint agreement the Contractor is responsible for the damage.

In this way, customers do not have to argue the legal basis of their own claims. Our customer’s claim therefore covers the difference between the actual cost of the damage and the insurance payout. It is important that If and the customer draw up an agenda regarding recourse at an early stage, and discuss how the collaborative task should be implemented, what information is needed, timescales, etc.

The recourse process

Once our respective claim has been submitted, we expect some kind of reply from the respondent. Normally, they in turn submit the claim to their insurance company which then has the task of meeting our claim on behalf of their customer. If it happens that the respondent also has insurance with If, it makes no difference: we deal with ‘internal recourse’ issues in exactly the same way as we would with another insurance company. Of course, the process would be more efficient, but no party should feel injured simply because both are insured with If.

Of course it is best not only that the respondent admits responsibility for the damage, but also accepts and pays the full amount of the claim. That however is unusual, and more often they refuse to admit liability and oppose our claim with legal objections and reductions of the amount of our claim, which of course then means that we have to start sharpening our pencils.

We have the competence to develop our case legally, and the customer may take advantage of this by referring to our experts, but If does not have the power to speak on the client’s behalf, or to argue that the insured’s claim is justified, which is why the customer must undertake that aspect of the case.

Legal actions to be taken if agreement not reached

Unfortunately, it is not uncommon to receive no response at all from the party that we regard as being responsible for the damage, so it is often the case that we are not able to reach agreement with the respondent and their insurers regarding responsibility or the amount claimed. If we get no response or are unable to reach agreement, we are forced to take legal action either in the common court or exceptionally the court of arbitration.

Because of the rules of due process and the way in which cases may develop, we recommend our clients always to take advice from their own legal representatives regarding taking the case to court. They must assess the claim in terms of the risk of losing and the costs that may be incurred – and, if necessary, take up the customer’s case in both legal argument and assessment of the amount of the claim.

If must also carry out an assessment of the chances of success. If both, or only one, finds reason to seek legal redress for the claim, If and the customer are also continuously dependent on co-operation as one may possess information significant to the other’s success.

Agreement between insurance companies

In order to safeguard the interests of the insurance industry, several its main members in the Swedish insurance market have for reasons of efficiency agreed on procedures for handling recourse between companies in various situations, such as the Recourse Agreement (RÖ) and the Double Insurance Agreement (DÖ).

It is not possible to give a more detailed account of these agreements here, but the reader should realise that for us the most significant aspect of the agreement is that it may limit right of recourse for associated insurance companies. On the other hand, it offers the possibility of protection against claims. It is therefore stressed that only the insurance companies connected with the agreement have the right to invoke it.

Significance of recourse from the customer and society perspective

The more short-term advantage conferred by a successful recovery is of course that both insured and insurer obtain compensation, in the customer’s case the amount not covered by insurance, and in If’s case recovery of the amount paid out. From a longer-term perspective, this is reflected in the insured’s claims history, and means that future premiums will be affected to a lesser extent because we have received compensation, and because If has received recourse revenues the ‘balance’ in the customer’s claims statistics is also adjusted.

As described above, it is If’s policy that during internal recoveries we should act in the same way as if another company were involved. An objection to this is that we should be able to act summarily because in the end it is If that pays the final amount. However, it is our attitude that an insurance claim should be set against the right policy, irrespective of whether it is with If or another company that pays the final compensation.

The reason for this is justified from a macro perspective, in that setting the costs of a claim against the sector category that involves the insurance claims makes recourse a preventive function, thereby forming an incentive to incident prevention on the part of those most likely to affect the risk that something dangerous could occur. If we avoid commonly occurring and therefore unnecessary claims, there is no doubt that insurers would be able to deliver better and more extensive insurance cover at a significantly lower cost.

The future

Should If’s claims adjusters not be able to complete a recourse action, perhaps because they have encountered a highly complex legal response, it falls to me to take over the case. My task as a recourse specialist it to take a closer look at If’s recourse business, which means that a large number and variety of recourse cases pass across my desk.

One trend I have noticed is that clients enter into contracts where the parties agree in writing not to make damages claims against one another. The implication of this is quite simply that If’s chances of recovery are severely reduced in the event of a claim. Another even more common trend is for the purchasing party to take out insurance on issues that the other party would otherwise have to insure against.

Where If is the purchaser’s insurer and the other party causes damage, it becomes impossible for If to make a recovery against those who actually caused the problem. Whether both examples are consistent with the respective insurance agreement depends on individual cases and cannot be discussed here, but I often wonder if customers fully consider the consequences of such agreements, and whether this is something that will become more common in future.

Those who come under the above heading lose their significance in these situations, and the question should perhaps be whether discussions should be held between those involved – the insurer, the broker, and the insured party.

Most industrial customers that I meet in the course of various recourse cases have good and well-developed risk-management organisations, and it is rewarding to work with them, not only in current insurance recourse cases, but also to provide input in work that prevents future risks that may arise in the various business matters in which the customer is involved.

Closure

I would like to close this account with a few points that, in addition to the above, further describe what should be considered in this context: 

  • we prefer the insured to use existing industry agreements in their business relations;
  • check not only the conditions in the agreement that the business partners should have insurance protection, but also that it exists and that it provides the necessary cover
  • the insured should ensure that business partners comply with the safety regulations stated in If’s conditions of insurance; if safety regulations are not followed, insurance compensation in the event of a claim may be affected irrespective of whether it is the insured or the partner that has broken the conditions. 

Anders Rosqvist